|
News Release
HUD No. 08-20 Steve O'Halloran (202) 708-0980 http://www.hud.gov/news/index.cfm
HUD SECRETARY ENCOURAGES CONGRESS TO COMPLETE WORK ON FHA REFORM LEGISLATION Letter to Congress lays out key provisions for strengthening FHA's financial position and ability to provide safe mortgage alternatives
WASHINGTON - Homeowners are desperately waiting for Congress to approve final legislation that will give hundreds of thousands families access to government-backed options for refinancing their existing mortgages. In a letter to the Chairmen of the Senate Committee on Banking, Housing, and Urban Affairs and House Financial Services Committee, U.S. Housing and Urban Development Secretary Alphonso Jackson laid out several key provisions that would strengthen the Federal Housing Administration's (FHA) financial position and provide a safe mortgage alternative for homebuyers.
"The FHA's core mission is to expand homeownership opportunities to low- and moderate-income, first-time homebuyers who are underserved, or not served, by the existing conventional mortgage marketplace. Efforts to modernize the FHA are particularly pressing during this period of volatility in the real estate markets and contraction in the mortgage markets," Jackson wrote.
First sent by President Bush to Congress nearly two years ago, bipartisan legislation to reform the Federal Housing Administration still has not received final approval by the Congress. Jackson's letters stressed the importance of FHA's ability to offer fair and equitable insurance premiums, to provide flexible downpayment options, and to permanently increase FHA's loan limits.
Below is a complete copy of the Secretary's letter to Senator Dodd and Congressman Frank.
February 11, 2008
The Honorable Barney Frank
Chairman, Committee on Financial Services
U. S. House of Representatives
Washington, DC 20515-6050
The Honorable Christopher J. Dodd
Chairman, Committee on Banking,
Housing, and Urban Affairs
United States Senate
Washington, DC 20510-6075
Dear Messrs. Chairmen:
This letter presents the views of the U.S. Department of Housing and Urban Development on efforts by Congress to modernize and reform the Federal Housing Administration (FHA) through the passage of H.R. 1852 (the Expanding American Homeownership Act of 2007) and S. 2338 (the FHA Modernization Act of 2007). As the House-Senate conference on FHA reform legislation commences, HUD urges the Congress to reach agreement on a bill to modernize FHA that the President can sign into law. This becomes more critical as the housing market continues to decline.
The FHA's core mission is to expand homeownership opportunities to low- and moderate-income, first-time homebuyers who are underserved, or not served, by the existing conventional mortgage marketplace. Efforts to modernize the FHA are particularly pressing during this period of volatility in the real estate markets and contraction in the mortgage markets. As a result, HUD supports the inclusion of several key provisions from H.R. 1852 and S. 2338 that strengthen FHA's financial position and provide a safe mortgage alternative for homebuyers. These provisions are discussed below.
Fair and Equitable Insurance Premiums
A key component of FHA reform is the ability of FHA to offer fair and equitable mortgage insurance premium structures that are commensurate with the risk presented by the loans insured. As a result, FHA supports neither the provisions in H.R. 1852, which would limit FHA's ability to lower insurance premiums for borrowers with good credit histories, nor those in S. 2338, which would impose a 12-month moratorium on HUD's proposed modification to the current FHA premium structure.
A fair and equitable mortgage insurance premium structure is very important to FHA's ability to manage the Mutual Mortgage Insurance Fund in a financially sound manner. FHA's experience has shown that most of its lower income borrowers have higher FICO scores, and a significant population of such borrowers would receive the lower insurance premiums under the Administration's proposal. Especially in the current economic environment, when market-rate loans are increasingly difficult to obtain, FHA needs to manage its insurance funds in a manner that is safe and sound and that guarantees its financial solvency in the future, so that it may continue to reach the very types of borrowers who most need access to market-rate home loans.
FHA financing is a better option for many first-time homebuyers who are often younger and have less savings and thinner credit histories, two characteristics that make it more difficult to secure market-rate financing. FHA needs to continue to serve these borrowers, but cannot do so without improving its risk-management strategy. H.R. 1852, for example, undercuts this strategy by limiting the premium flexibility only to higher-risk and zero- or lower-downpayment borrowers, without allowing FHA to charge lower premiums to proven, responsible, lower-income borrowers exhibiting good credit histories.
Insurance is about balancing risk and balancing premium income against losses. Without that balance, FHA becomes a full-fledged subsidy program, with the ultimate costs being borne by the taxpayer. The strength of the FHA insurance operation today is that its benefits are paid for by its beneficiaries.
Unfortunately, the self-sustaining nature of the FHA insurance fund has been severely threatened in recent years by a shift in the overall composition of the FHA borrower pool. FHA has been serving fewer lower-risk borrowers and more higher-risk borrowers, particularly those relying on seller-funded nonprofit downpayment assistance programs. As a result of this shift, FHA has found itself in a position where the level of cross-subsidization is no longer adequate to continue to operate without congressional appropriations or an across-the-board premium increase, which will only perpetuate FHA's adverse selection problem. The Government Accountability Office (GAO) made this case in its June 2007 report regarding FHA Modernization. The GAO said, "And while raising premiums for some higher-risk borrowers could improve the Fund's credit subsidy rate, raising premiums for all borrowers might exacerbate FHA's adverse selection problem. That is, FHA could lose higher credit quality borrowers, resulting in fewer borrowers to subsidize lower credit quality borrowers. This, in turn, could require FHA to raise premiums again."
In addition to the adverse provisions in H.R. 1852, S. 2338 would place a moratorium on FHA's proposed premium structure; a premium structure intended to bolster and protect FHA's tradition of cross-subsidizing higher-risk borrowers with premium generated from lower-risk borrowers. While a one-size-fits-all mortgage insurance premium structure has worked for decades, FHA will move ever closer toward financial insolvency, given the uncertainty and volatility in today's mortgage market if forced to continue its current premium structure. As you are aware, hundreds of thousands of borrowers are in a serious financial predicament that negatively affects not just them, but also the communities in which they live. FHA should be able to equitably assist these borrowers. The level of cross-subsidization needed can only be achieved by putting FHA in a position to serve an adequate proportion of both types of borrowers to balance out the risk.
Downpayment
HUD strongly supports the provision in S. 2338 expressly prohibiting downpayment assistance from the seller or from any other person or entity that financially benefits from the transaction. As HUD has previously reported to Congress and the public, insured loans relying upon seller-funded downpayment assistance present an unacceptable risk of default and foreclosure than do other loans. The cumulative default rate for these types of loans is higher than FHA loans without this type of so-called assistance. The House bill does not contain such a prohibition, and HUD strongly urges Congress to prohibit seller-funded downpayment assistance in any final legislation on FHA reform.
If the FHA is forced to continue to accept loans with this type of so-called assistance, and is simultaneously barred from adjusting its premiums in a manner that addresses the enormous additional risks posed by these loans, then it would face the need for a $1.4 billion appropriation in Fiscal Year (FY) 2009 to operate. This amount reflects the Administration's loan subsidy estimate that would be used to execute the FY 2009 appropriation bill should no changes be made to the current mortgage insurance program.
HUD favors legislation that contains flexible downpayment options and higher loan-to-value ratios than currently permitted by statute. Because the downpayment requirement represents the single biggest barrier to homeownership, HUD supports the provisions in S. 2338 that lower the borrower's cash investment requirement from 3 percent to 1.5 percent of the appraised value of the property. Although H.R. 1852 provides similar flexibility in the form of a zero-downpayment option, the House provision limits this benefit to first-time homebuyers. Such a limitation would hinder the ability of some current homeowners to refinance into an FHA-insured loan. By removing this limitation, FHA could provide existing homeowners with additional flexibility in managing mortgage debt.
Affordable Housing Grant Fund
Although HUD strongly supports federal assistance to individuals and families that lack the means to afford adequate housing, HUD strongly opposes the provision in H.R. 1852 that establishes a new Affordable Housing Grant Fund linked to increased FHA receipts. As stated in previous policy statements, FHA receipts are already credited toward HUD appropriations, and a new program that attempts to divert this revenue would reduce resources available for other HUD programs that assist low-income individuals and families.
FHA Loan Limits
HUD supports the provisions of S. 2338 that authorize a permanent increase in FHA loan limits from $362,790 to $417,000 or 100 percent of the Federal Home Loan Mortgage Corporation (Freddie Mac) conforming loan limit in high-cost areas, and from $200,160 to $271,050 in lower-cost areas. These changes are needed to allow FHA's single-family program to insure loans in high cost areas. HUD supports these limits; however, HUD does not support the provisions of H.R. 1852 that authorize FHA to permanently guarantee loans greater than the conforming loan limit, because FHA's single-family program should remain targeted to traditionally underserved homebuyers, such as low- and moderate-income and first-time homebuyers. A temporary loan limit increase for FHA and the Government-Sponsored Enterprises (GSEs) will be enacted as part of the economic growth package. This does not change the Administration's position on proposals to increase loan limits on a more permanent basis.
HECM
HUD is in agreement with the provisions in H.R. 1852 and S. 2338 that increase the number of Home Equity Conversion Mortgages (HECMs or "reverse mortgages") that may be insured by FHA, while authorizing HECMs for use in condominium units and purchase transactions. HUD applauds these amendments because they help ensure the ability of FHA to serve a larger number of targeted homebuyers, in more areas of the nation, than are being served under the present HECM program. However, HUD encourages the Congress to remove provisions contained in both H.R. 1852 and S. 2338 that propose a 1.5 percent limitation on HECM loan origination fees. HUD is aware of the need to protect seniors from potentially excessive fees, but believes any such limitations should be flexible enough to respond to a changing market. Thus, such limitations should be established through Federal Register notice or other appropriate vehicle, instead of through a rigid statutory framework.
Correspondent Lenders in FHA Programs
HUD strongly opposes a provision in H.R. 1852 that would permit correspondent lenders to participate in FHA programs without meeting audit and minimal net worth requirements. Current FHA requirements to submit an audited financial statement represent a critical component of ensuring that the FHA-approved lender is a responsible, financially stable entity. Although H.R. 1852 requires correspondent lenders to post a surety bond in lieu of audited financial statements, surety bonds do not provide any independent evaluation of financial stability, internal control systems, or compliance with FHA requirements.
If enacted, this provision in H.R. 1852 could allow participation in FHA programs by lenders or mortgage brokers who are inadequately capitalized or have internal control difficulties. It would be a mistake during this period of mortgage market volatility to force FHA to lower its lender approval threshold (while state governments are raising their standards) and allow undercapitalized lenders to compromise the stability of the FHA insurance fund. HUD urges the Congress to exclude this provision in final legislation.
HUD remains committed to modernizing and reforming the FHA, and looks forward to working with the Congress to ensure that concerns are quickly addressed and that the final legislation includes necessary programmatic and policy reforms. Thank you for the opportunity to comment.
The Office of Management and Budget advises that from the standpoint of the Administration's program, there is no objection to the transmission of this letter.
Sincerely,
|
